Southern Company (The)

Q3 2022 Earnings Conference Call

10/27/2022

spk06: Good afternoon. My name is Scott, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Southern Company third quarter 2022 earnings call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. At that time, you can press the 1 followed by the 4 on your telephone to kill for a question. I would now like to turn the call over to Mr. Scott Gamble, Vice President, Investor Relations and Treasurer.
spk01: Please go ahead, sir. Thank you, Scott. Good afternoon and welcome to Southern Company's third quarter 2022 earnings call. Joining me today are Tom Fanning, Chairman, President, and Chief Executive Officer of Southern Company, and Dan Tucker, Chief Financial Officer. Let me remind you we'll be making forward-looking statements today in addition to providing historical information. Various important factors could cause actual results to differ materially from those indicated in the forward-looking statements, including those discussed in our Form 10-K, Form 10Qs, and subsequent filings. In addition, we'll provide non-GAAP financial information on this call. Reconciliations to the applicable GAAP measure are included in the financial information we released this morning, as well as the slides for this conference call, which are both available on our Investor Relations website at investor.southerncompany.com. At this time, I'll turn the call over to Tom Fanning.
spk11: Thank you, Scott. Good afternoon, and thank you for joining us today. Our third quarter financial results continue to support our full year earnings objectives, and the economies within our service territories remain strong, including customer growth and economic activity that has outpaced our expectations. Given our financial performance through the third quarter, we expect full year adjusted earnings per share near the top of our earnings guidance range. Before turning the call over to Dan for a more detailed look at our financial performance, I'd first like to provide an update on the recent progress at Plant Vogel Units 3 and 4. Importantly, the projected completion timeline and capital cost forecast for both units remain consistent with what we outlined last quarter. Since our last call, the site team has continued to make substantial progress on Unit 3 highlighted by the successful achievement of several major milestones, including submitting the all ITAC complete letter, receiving the 103G finding from the NRC, which signifies that license acceptance criteria for Unit 3 have been met, and successfully completing the safe transfer of all 157 fuel assemblies from Unit 3 spent fuel pool to the reactor core early last week. Fuel load marked another historic and pivotal milestone towards startup and commercial operations. The focus over the next couple of months turns to final preparations and testing of systems primarily associated with the electric power production side of the plant and achieving the pristine conditions in the nuclear island necessary for startup activities. The next major milestone for Unit 3 is initial criticality, or the first self-sustaining nuclear reaction, which is projected in January. Once this important milestone is achieved, plant operators can begin the prescribed testing sequence, which includes a series of power ascensions and reductions, various sustained power output plateaus, and multiple force trips to test the unit's safety systems. This rigorous process is intended to demonstrate the performance of the unit under a variety of conditions and its readiness to be included in reliable dispatch and to be placed in service for the benefit of customers. We continue to project Unit 3 will be placed in service by the end of the first quarter 2023. Turning to Unit 4, Open vessel testing was completed in August, and direct construction is now approximately 97% complete. Electrical production, in particular electrical terminations, remains a key area of focus. To support our projected December 2023 in-service date, recent electrical production levels must be sustained for several more weeks. Testing is expected to become the critical path as the project team progresses towards future milestones of cold hydro testing and the start of hot functional testing, which is projected by the end of the first quarter 2023. Dan, I'll now turn the call over to you.
spk12: Thanks, Tom, and good afternoon, everyone. As Tom mentioned, we had a strong quarter with adjusted earnings of $1.31 per share eight cents higher than the third quarter of 2021. The primary drivers for the year-over-year increase are higher revenues associated with increased usage and retail pricing out of regulated utilities. These revenue effects were partially offset by higher non-fuel O&M expenses consistent with the rising cost environment and our long-term commitments to reliability and resiliency, along with higher interest and share dilution from the mandatory conversion of our equity unit. A detailed reconciliation of our reported and adjusted results as compared to 2021 is included in today's release and earnings package. Turning now to retail electricity sales in the economy, in the third quarter of 2022, weather normal retail sales were 1.8% higher than in the third quarter of 2021. This increase reflects stronger sales across all three customer classes, as we've continued to see expansion across our southeast electric service territories. We also continue to see robust customer growth, with the addition of 11,000 residential electric customers and 8,000 residential gas customers during the quarter. We are encouraged by these trends and continue to monitor the potential impacts of supply chain constraints, labor force participation, and inflation pressures on our outlook. The economic development pipeline in our service territories remains robust. Within our electric service territories, economic development announcements through the first nine months of 2022 compared to the same period in 2021 reflect a 170% increase in job additions and a 237% increase in business investment. Next, I'd like to provide you with an update on our outlook for the remainder of 2022. With adjusted earnings per share through September of $3.35, we expect to achieve adjusted full-year earnings near the top end of our guidance range of $3.50 to $3.60 per share. Our adjusted earnings estimate for the fourth quarter is $0.23 per share. Tom, I'll turn the call back over to you.
spk11: Thanks, Dan. We remain encouraged by the sustained level of economic development activity within our service territories as we continue a long legacy of partnering with each of our states to attract new business. In recognition of these efforts, Alabama Power and Georgia Power were once again named to Site Selection Magazine's Top 20 Utilities in Economic Development out of approximately 3,330 utilities across the United States. based on capital investment and job creation activity. We are honored by this recognition and look forward to continuing our commitment to helping our states and communities attract and grow businesses to further strengthen the economies within our service territories for years to come. In closing, I would like to take a moment to highlight a significant safety milestone that the Vogel Project achieved this month When the site successfully completed its 68 millionth job hour lost, I mean, without a lost time incident, that 68 millionth job hour without a lost time incident. At Southern Company, safety represents a key tenant of our uncompromising values. And this milestone is a testament to the project team's focus on creating a safety first culture. I'd like to recognize Sean McGarvey from the North American Building Trades and Lonnie Stevens from the IBEW, along with all of the thousands of individuals that they represent, for their tremendous ongoing support at Plant Vogel Units 3 and 4. These groups have been terrific business partners for us, and the recent achievement of several major milestones is a tribute to the dedication of thousands of men and women committed to bringing Vogel Units 3 and 4 safely online to provide Georgia with a reliable, carbon-free resource for the next 60 to 80 years. Thank you all for joining us this afternoon. Operator, we're now ready to take questions.
spk06: Thank you. If you'd like to register a question, please press the 1 followed by the 4 on your telephone. You will hear a three-tone prompt to acknowledge your request. If your question has been answered and you would like to withdraw your registration, please press the 1 followed by the 3. And if you're using a speakerphone, please lift your handset before entering your request. One moment, please, for the first question. We have a question from Char Puriza with Guggenheim Partners. Please go ahead. Your line's open. Hey, guys.
spk10: Tom, I think you just got the fastest reward for the quickest prepared remarks, so that was good.
spk11: Just just got made vice president. Give him all the credit.
spk10: There you go. Just quickly on the Georgia GRC, I guess, how are discussions going with interveners? I mean, so the staff recommending, you know, both a 9-4-5 ROE as well as a reduction in the equity layer when Vogel's fully in service seems somewhat counter to what, you know, we're seeing with capital market conditions and kind of the risks that are out there, I guess. What are your thoughts around a settlement and narrowing that dead ask, or do you think this case will likely go the litigated route?
spk11: Well, you do know that this is an accounting order is what it's been since 1995, which means it's not technically kind of a litigated kind of thing. You know that this process has been in place since 1995 and that It really is, I think, a process that has been proven, tried and true, to let every party have their say and have a constructive outcome. I think we've proven that time and time again. You know, us commenting on any particular part of anybody's testimony at this point really isn't constructive. Let the process run, and I'm sure we'll be treated in a constructive way at the end of it.
spk10: Got it. Perfect, thanks. And then just on Volkl, where do things now stand with the other co-owners in terms of resolving any sort of outstanding cost cap or contribution concerns, and I guess what that ultimately means for your ownership of the project and so on?
spk11: I'll turn this over to Dan here in just a second for some more details, but effectively... Among it, between Oglethorpe and Dalton and MEAAG, we have reached an agreement, a settlement with MEAAG. My sense is, Dan, you're not going to know anything else about the rest of these, likely until the end of next year.
spk12: Yeah, that's right. And so the settlement with MEAAG, you might see in the materials a slight cost revision for Georgia Power's ownership, and that's really reflective of that settlement. Our assumptions previously assumed as many of you know, this notion of a tender or a put of ownership from any of the co owners. And since that was not part of the resolution, we reached the kind of our estimate of the impact of the settlement is less than our previous system.
spk10: Got it. Thanks for that. And then just lastly, I know you guys have previously have talked about Georgia power, just not really being super competitive against, you know, third-party developers in terms of winning, you know, the solar RFPs. Sort of with the tax credit changes, you know, with transferability, solar PTCs, et cetera, that came with the IRA, could Georgia Power now potentially be able to compete and win a portion of the solar RFPs we're looking at that Georgia is going to be running? And then how do we sort of think about that versus what you assume in the current guide? Thanks.
spk11: Frederick, your question is exactly right. Any differences we had were related to tax treatments flow through versus some sort of normalized treatment on the part of Georgia Power. You know, it's interesting. I think during one of the early rounds in other years, we had developers take positions and then Southern Power actually came in and said, took them out of those positions. So we could compete another way. My sense is the IRA is really going to be helpful to all regulated utilities that otherwise use normalized accounting. And it does put us much closer on an equal footing to those folks. The other thing that we always have to take into account, particularly with renewables that have distributed sites across our service territory, is that Southern is reasonably well known for thinking about our expansion plan on a portfolio basis. Of course, each company reaches its own conclusion within that portfolio. But those kinds of considerations have to be met, especially when you consider wrapping into that the closure of certain coal plants over time. So we'll see how it goes, but I think overall the IRA is really helpful. Dan, you want to add?
spk12: Yeah. Char, it's important to think about this in terms of the planning horizon, right? So this is a longer-term dynamic. So you're not going to see very much on the front end of the five-year plan. Those decisions have already been made. Those RFPs have already been executed for resources. So you're really talking about the back half or even the last couple of years of our five-year forecast where this opportunity may manifest itself as potentially rate-based assets The other thing that is a new dynamic that's entering into the equation, you know, certainly affordability and kind of a low-cost profile is what these tax benefits change. Other considerations will begin to factor in to some of these resource decisions. Location, how much the, you know, the controllability of them. And so it's kind of the difference between the notion of least cost versus best cost where there's locational dynamics and other things at play.
spk11: And every bit of the IRA to us just serves to reduce the transition cost of our current position to a net zero future, all for the benefit of our customers. We don't make money off tax benefits. We typically flow them through for the benefit of customers.
spk10: Got it. Terrific, guys. Thanks so much, and we'll see you in a couple weeks. Appreciate it.
spk11: You bet. Look forward to it.
spk06: Our next question is from Ross Fowler with UBS. Please go ahead. Your line's open.
spk03: Hey, good. How are you? Um, so just a couple of questions. One, you know, election day is two weeks away, but we're not going to have a Georgia election, a commission election on that day. So can you just remind us what the process is from here around redistricting and how that actually works, whether it's a statewide or, you know, a district election and, and how that would sort of proceed.
spk11: I haven't figured it out yet. This is work ahead for the legislature to undertake, most likely through next year. Our sense is this is not going to be something that's going to reach a conclusion anytime quickly. There's going to be a lot of debate and a lot of thoughtful consideration about how to put this into place. So really can't guess on it right now, and I really don't have an estimate on any timeframe. My sense is it's going to take some time. I don't think we're going to get a result anytime soon.
spk12: And some of that time may be because it becomes a bit of an iterative process between the legislature and the court.
spk03: Thanks, Dan. So the current commission would sit until that process was complete. Is that a correct understanding?
spk11: That's right.
spk03: Okay. And then just maybe remind us as we're in congratulations on the field load, that's a big step. As we get to putting Unit 3 and Unit 4 into service, how do the ROE penalties roll off over time? If Unit 4 is done on December 23, then there are no more penalties in 2024, if I'm thinking about it correctly.
spk12: Sure, Ross. Again, as a reminder, all of our outlook assumes A total cost for Vogel that goes into rates is $7.3 billion. And so the way that will break down in terms of rolling into base rates and thus earning Georgia Power's full allowed ROE, there's $2.1 billion that will go into rate base the month after Unit 3 goes into service. And then the remainder following prudence proceeding next year would go into rates the month after Unit 4 goes into service. And so based on the current schedule, you'd be at Georgia Power's full allowed ROE on $7.3 billion for the full year 2024.
spk03: And, Dan, the penalties now pretty much put you at the cost of debt, right, with the timing of how it's worked, right?
spk12: The passage of time and the increase in the cost of debt. We're essentially there.
spk03: Okay. And then the prudency process you mentioned, that starts on – fuel load at Unit 4? Correct, fuel load. Summer of 23. Of 23 on the current schedule. All right, thanks, Tom. Thanks, Dan. Congratulations on fuel load.
spk11: Always good having you.
spk06: Our next question is from Jeremy Toney with J.P. Morgan. Please go ahead. Your line's open.
spk00: Hey, Jeremy. How are you? Good, good. Good afternoon. Thanks for having me. You touched a bit on it before, but as it relates to IRA, just wondering, are there any other aspects to the bill that impacts Southern that you could share with us at this point that you've determined? Clearly, benefits for the customer is very important here, but other types of tax credits beyond renewables, would that impact Southern or minimum tax? Just wondering if you could share thoughts on the bill more broadly and its impact on Southern.
spk11: The minimum tax thing really ended up not making much of a difference, particularly with the latest change they made. That doesn't impact us hardly at all. You know, this sounds like a policy response, but look, longer term, helping with 45Q and research and development and hydrogen, those are all good things that help us get from Bob Traylor- Say we've already hit our 50% reduction goal we put it in place in 2030 we hit it a decade early in 2020 getting from 50 to 80 we think we know how to do that to. Bob Traylor- Getting from 80 to 100 is where are these things that relate to innovation and research and development will be helpful, obviously those expenditures will happen before they're put into place, in particular, some of the things that we're interested in our. This trade you make in the 30s and 40s between nuclear and combined cycle with carbon capture and sequestration, and certainly in respect of the cost of adding more renewables, is something we're focused on. All of those provisions, as they're addressed in the bill, are helpful.
spk12: Yeah, and Jeremy, I'd say the other things that we're kind of exploring and trying to better understand and certainly waiting for IRS guidance is the – Normalization opt out for storage. That's something we're certainly evaluating how that impacts customer rates. The transferability of these tax credits is particularly interesting, especially within Southern Power, where historically we might have used tax equity. This creates a new, perhaps better dynamic in that regard. You know, there's been a lot of discussion about the nuclear PTC, but we right now, as we sit here, based on our interpretation, don't see that having any meaningful impact for us. But Again, we'll wait for guidance on that and see how that turns out.
spk11: Yeah, and in general, what we really like about the idea of this bill is the structure that the credits are effectively technology neutral and therefore let the market work to show what is best in place for our customers over time.
spk12: Yeah, and the certainty that these are there for the next 10 years provides a lot of flexibility in planning and the way we think about our business.
spk00: Got it. That's all very helpful. I just wanted to pick up with the part that you talked about nuclear there and saw during the quarter there's a key milestone with Southern Company and TerraPower as it relates to their molten chloride fast reactor. And I was just wondering if you could provide us your thoughts as far as when you think that type of technology, you know, could come into play for, you know, utility scale proven up, you know, what type of timeframe there and having, you know, having the ability to ramp up and down quickly there, I guess, the benefits that could provide as part of the generation of SAC.
spk11: Yeah, yeah. I would argue that the new nuclear future of America will likely start with SMRs. We hear a lot about people discussing putting small modular reactors into effect. I mean, that could happen last half of this decade, certainly. The larger Gen 4 reactors that you're referencing, to me, are kind of mid-30s and beyond.
spk00: Got it. That's helpful. I'll leave it there. Thanks. Thank you.
spk06: We have a question from David Arcaro with Morgan Stanley. Please go ahead. Your line's open.
spk09: Hey. Hey, thanks so much for the time. I was wondering if you could give a little bit more color around just the updates on Unit 4. The timeframe didn't shift. Just wondering for additional color around how productivity has been relative to recent targets based on just eyeballing the green line and the red line. Looks like maybe even a little bit ahead over the last few months. And has there been increasing clarity with the progress that you've made on Unit 3 also as you look to Unit 4?
spk11: Well, Dan, you and I should tag team this one as well. I'll start. We're gratified with the progress on electrical terminations. We've always called that one out as a risk factor. And so long as we sustain our recent performance on the site through, say, November, then we're on track on that issue. So we're watching it very closely. We're gratified with the progress we've made. We just need to continue that progress. Obviously, as you've seen with Unit 3, our performance on these tests are particularly important. We believe that we've learned a lot from the tests on Unit 3, and where we had some delays due to equipment issues or system issues, we think we've learned a lot, and we don't expect to repeat that. some of the issues that we saw in Unit 3 on Unit 4. So our schedule reflects that as well. Dan?
spk12: Look, I think you hit the big issues. Testing will become a critical path here for Unit 4 in the near term, and it is certainly predicated on those lessons learned and it being a smooth process. And right now the focus is getting the right people focused on Unit 4 in that regard where they've been tied up on Unit 3 completing that work.
spk11: And, you know, all these discussions that Dan and I are referencing occur in a completely open and transparent environment you know we have our co-owners with us we have representatives from doe nrc the public commission staff etc i mean everybody gets to hear all this information the same way and i just think we're gratified with the progress we've made we see our way through to remaining comfortable with the time frames we're laying out okay great thanks for that um
spk09: And then separate topic, I was just wondering if you could touch on how you're managing interest rate headwinds right now with debt issuances coming next year. Any ways to hedge against that proactively or other ways that you're looking to manage potential EPS headwinds there?
spk11: Well, I will say this, you know, old dog, I don't know, old dog doesn't learn new tricks. Maybe that's not the right line here, but I'm an old finance guy and I really like this stuff. I like liability management. And I can remember back when Drew Evans was CFO and we were in this low interest rate environment, we were very intentional about reducing what I call our level of risk capital. That's short-term debt, debt due within one year, puttable debt, all that sort of thing. So we shortened our risk capital. We lengthened the duration of our assets. And I would argue, we do this plot, I think it's in your package, but Southern Company debt portfolio when you look at kind of total enterprise value of a corporation, is a really valuable asset. It's 18 years long on the average and has a really cheap coupon rate, three and a half or whatever. These guys have done a really nice job managing it. Dan?
spk12: Yeah, so to Tom's point, we're starting from a great place in that regard. We've done things this year to take risk off the table, accelerating or upsizing some of our issuances. taking some of the variability out of the portfolio here in the short term. We'll continue to do those things. And then, look, already in 22, interest rates certainly are having an impact on our results, and we've been able to offset that. We've got levers within the business to do that, and we'll continue to focus on those as we move forward. Like with anyone, I mean, we were fairly – conservative about our assumptions over the long term, and like everyone, I'm sure our assumptions in the short term were pretty far off, but we're managing through that.
spk11: It's just another issue that we deal with. That's right.
spk09: Yeah, great. Now that's helpful. Thanks so much.
spk06: Thank you. We have a question from Nick Campanella with Credit Suisse. Please go ahead. Your line's open.
spk11: Hey, Nick. Hope you're doing great.
spk15: I am. Thank you. I hope everyone else is doing good as well. Thanks for taking the questions. I guess just to follow up on the interest rate kind of commentary.
spk16: I'm really just kind of thinking about through next year and the drivers of 23. Not to get ahead of it, but could you just give us any kind of comments on how you're thinking about the growth rate into 23? I know you've had this 415 marker out there for 24. And I think on previous calls, we kind of talked about bridging the gap to that 415. But you have the ROE penalty, maybe some potential higher financing costs. Your sales commentary seems pretty strong, and you also have new rates at Georgia Power. So just any other considerations to be thinking of?
spk11: Yeah, and not to pick at your question, but all we've ever said about 24 is $4 to 430. I think you were just picking the midpoint. Our range has always been $4 to $4.30. We put that in place some years ago. Dan?
spk12: Yeah, and Nick, we're not going to change course here. We always provide our annual guidance on our fourth quarter call, so we'll do that again here in February and put our 23 number out there for the first time. And what we are also likely to do in February is we will narrow that $4 to $4.30 based on what we see at the time. One of the important factors and real uncertainties that existed three years ago when we put that in place was knowing we'd have, you know, another Georgia Power rate case and, of course, everything else that has transpired in those three years. So once we get past that, we'll be positioned to narrow that down.
spk16: That's helpful. And, yeah, I was just picking the midpoint but understood 4 to 430. I guess just on the sales growth, you know, you're – kind of commentary on the economy and your current footprint was notable and just we've seen some of your peers starting to revise longer term sales load, you know, higher. Just how are you kind of thinking about that as we prepare for more of a longer term update in the fourth quarter call?
spk11: Yeah, I don't know whether you saw my thing on CNBC this morning on Squawk Box, but it is a consistent refrain and we're actually surprised a wee bit. Our growth so far has been much higher than what we thought. And it's pretty comprehensive. A summary, though, is kind of notable. I was looking through all of our material. We are essentially back to pre-COVID levels on commercial and industrial sales. Our residential sales number is a little over 5% improved. I think that's probably a reflection of a number of things. but including kind of workforce America's reaction to this new hybrid work environment we're finding. The other thing Dan mentioned is the economic development data, which continues to be strong. We don't see much of a reduction, a slowing in those numbers. You know, I have a background with the Fed, and so I always get into the nerdy economic details, but One of the things that our head economist here, Kenneth Shiver, does is look at particular industrial segments. So we take our top 10 industrial segments, which represent, I think, about 80% of our sales for the industrial segment. And we do look at not only kind of period over period results, which still show really positive growth, everything looking pretty good. We go to the trouble of going to the first derivative, and I would call that a momentum statistic. That would show that even though we still show really good growth, that the amount of growth is moderating. And we just need to kind of think about that as we look going forward. I know a lot of my peers around the country and the economists and the Fed and all the pundits are talking about potentially a mild recession sometime first, second, third quarters of 2023, we see no data for the southeast that indicates that would be here. So when you hear recession data, just know that generally speaking, it is national broad brush kind of statistic. The southeast region appears to be, by the data we have, much more resilient and much less prone to such a downturn.
spk16: Hey, helpful commentary. I really appreciate it. We'll see you soon.
spk11: You bet.
spk06: We have a question from Julian Dumoulin-Smith with Bank of America. Please go ahead, Julian. It's open.
spk11: Hey, Julian. Great to see you.
spk13: Hey, thanks for taking the time. I appreciate it. Good to see you of late and pleasure to chat. Hey, listen, Tom, I wanted to ask you a question specifically here. I mean, we saw some headlines in the quarter here about perhaps your eventual retirement here. Can you talk a little bit about succession planning and just where we stand in that process? And, Tom, specifically, how long are you thinking about staying vis-a-vis the in-service of the units here, just to prep the street around your thought process?
spk11: Yeah, there's been a lot written about that. I'm feeling like Methuselah, for heaven's sakes. Look, uh, I am 65 and a half. So that's a fact. Uh, somebody saw fit to write an article about that. The fact is, uh, Southern companies board has made no assessment of that one way or the other. There is no timetable for me leaving. I certainly have an interest in progressing the Vogel units. Um, that's for sure. You should know also, one of my comments to that reporter, I think, got misconstrued or I don't know. He asked me, are you looking for a successor? And I said, look, it's every CEO's job, first day they get there, to have a succession plan in place. That got turned into, I'm actively looking for a successor. Here's the truth of it. And you all know this, I think. When you look at our brothers and sisters around the United States, Southern Company has been a terrific place to grow talent. We have several subsidiaries where we can give people experiential opportunities beyond just growing within a silo of functions within their experience at the company. And it is our intention to do that. Somebody is successful in a certain area, we put them into a place where maybe they don't know as much. Maybe they're not as comfortable. and they've got to build new constituents in order to succeed. We have a very rigorous process. We have had a rigorous process for 20, 25 years of growing talent and moving them around. The latest example, Robin Bourne, who has been treasurer at Southern Company, is now, I guess effective November 1st, going to become CEO of Southern Power. This is just another example of how we move people around that show us that they have the capability to grow into senior, senior positions inside the company. So we'll continue with that. The great news is that there's good talent all over this industry. There's exceptional talent inside Southern. And I'm very, very happy with the bench, the Southern Company Management Council and beyond.
spk13: Excellent. Thank you for providing that and clearing the air, as you say, on some of the articles out there. If I can, just to follow up on Nick's last question a little bit, you all have a track record, especially through COVID, of finding offsets and reductions and just dealing with difficult context. To the extent to which we're dealing with inflation today, whether that manifests itself in the form of liability management and interest expense, or just generally elevated labor costs at Vogel and elsewhere. How are you thinking about providing a comprehensive update on that front as well? I know that you talked about narrowing 24-year, but can you talk a little bit more specifically about your efforts to manage inflation and offsets on that front as well?
spk12: As with just about anything, Julian, it's an all-of-the-above approach. Right. And it always has been for us. So we have managed both in the short term and, more importantly, in the long term around all these kind of issues, and we'll continue to do that. So to a degree, that will be changing the way we operate, becoming more efficient. It will be looking for ways to deploy capital that thus reduce O&M. It will be looking for ways to grow the business more to help offset O&M. what might otherwise be headwinds elsewhere. And then importantly, along the way, while we're focused on all of that, we'll also, as we always are, be focused on clean, safe, reliable, and importantly, affordable energy as we navigate this with our regulators and strike the right balance there.
spk13: Got it. All right. Fair enough. It'll be embedded in whatever you guys update on 24 at the end of the day.
spk12: I take it.
spk13: Yes, sir.
spk12: Excellent.
spk13: All right. Well, good luck, and we'll speak to you then.
spk11: Thank you, my friend.
spk06: We have a question from Michael Lapidus with Goldman Sachs. Please go ahead. Your line's open.
spk02: Hi. Thank you, guys. Hey, Tom, thank you and Dan for taking my questions. First one, a number of your peers have built up pretty sizable deferred fuel balances that may take a couple of years to recover, just given the spike in power and gas prices. Just curious whether you're seeing the same thing across your larger subsidiaries and in your conversations with stakeholders, how you're thinking about the timeline to recover those deferred fuel balances.
spk12: Yeah, Michael, this is Dan. So we are certainly having discussions with our regulators. We've been very transparent and proactive about making sure that they understand and appreciate this macro dynamic that has occurred, particularly with natural gas costs. And to an extent, coal prices as well. And so, yeah, we, like you mentioned, Michael, like many peers, have accumulated a pretty sizable under-recovered balance as of the end of the third quarter. In total, it's about $2.2 billion. The vast majority of that is at Georgia Power, which is about $1.7 billion. So with each of our jurisdictions, you know, the process is a little different. Some are a little more regular in their cadence. Some are a little more discretionary. I think the plan for that largest balance in Georgia will be addressed early next year. And, again, we'll work very closely with the regulators to make sure that's done in a way that is the least impactful for customers as possible.
spk11: And, Michael, I could just add as a comment on dogma. You know, as apart from the so-called organized markets, the integrated regulated markets, provide us a mechanism to pass through fuel costs. So there is no profit incentive for us. In other words, it's always incentive for us to keep prices as low as possible. And so we have done that. We've had programs in place that have helped us keep those costs low. This year we've hedged 34% of our Fuel prices, gas prices, at about $3.22. Next year, 32% at $4.73. Certainly, those are below the spot prices for natural gas right now. Nobody can predict the future, but certainly those kinds of programs, which have been put in place with the conjunction of the public service commissions, have been awfully helpful to reduce the pressure on that issue. Got it.
spk12: One last thing. So just in addition to that continuous proactive dialogue with regulators, we've been having similar conversations with the rating agencies, making sure that they're keenly aware of us likely having to carry a little incremental debt to see this through. But all of our subsidiaries, Georgia Power in particular, Alabama Power, Mississippi Power, have the financial strength to be able to weather that.
spk11: One last comment. I just want to do it, but on a going forward basis, once Vogel 3 and 4 go in service, the equivalent energy price coming out of that plant is going to be effectively about a buck per million BTU. It's going to be an awfully attractive asset. It will run 24-7, 365. Got it.
spk02: And then a follow-up question, a little bit unrelated. I mean, you know, Vogel CapEx should step down materially next year and then done in 2024, except for maintenance. And there's, Dan, you made the comment of, you know, if there's new generation additions coming in the capital plan, it's kind of in the back end of the plan. How are you thinking about the potential for incremental capital allocation? Not necessarily in 2023 because you're still spending on Vogel, but, you know, kind of in 24, 25 times, right?
spk12: Yeah, look, it's not unchanged from where we were earlier this year. I mean, our capital plan is designed to support our growth rate of five to seven percent. I think we highlighted in the fourth quarter call kind of the history of our planning process and how opportunities emerge the further out in the forecast you get as we roll the forecast forward. The numbers continue to increase as we get clarity on things, as we vet things with regulators, as new regulations emerge, as new technologies emerge. And I think that will continue to happen. And then we've got an allocation that we set aside for Southern Power. That's been a little quiet here in recent days because of the uncertainty that existed before IRA passed. I think you'll see that continue to ramp up. We've got a plan today, Michael, that doesn't require us to issue any equity to finance it. And to the extent we find more opportunities that are able to earn either our regulated returns or the returns that we require out of the projects at Southern Power, we'll adjust our financing plan. But I'm happy turn our equity plans on to finance more regulated growth.
spk11: Yeah, and Dan, please correct me if I misstate this, but I think you guys have done, you and your team, have done a great job illustrating to the investment community how we develop a CapEx estimate. And I'm being more direct than you were. The outer years are always underestimated. When you go through time, we end up spending more money than we estimate in the outer years. And if I had to estimate that in the current five-year plan, aren't we estimating something like $41 billion over five years? And if we kind of adjust it for what may happen, a more reasonable number may be as much as $45?
spk12: Yeah, I don't think that's unfair. And importantly, the $41, the starting point, is what supports our 5% to 7% growth rate. And so as more opportunities to invest are identified, It simply increases the durability of that growth rate, either in the short term or over the long term.
spk11: And you should know, all of you on the phone should know, that some companies put a bunch of plug estimates in there. We don't. We do sensitivities to indicate what may happen with higher CapEx, assuming we get appropriate recovery, which we think we would. But that's the way we are. We have a conservative plan.
spk02: Got it. Thank you, guys. Much appreciated.
spk11: Thank you.
spk06: We have a question from Durgis Chopra with Evercore ISI. Please go ahead. Your line's open.
spk11: Hey, Durgis. Great to have you with us.
spk08: Hey, Tom. Thanks for giving me the time. Hey, I have one housekeeping question and then just a follow-up. Forgive me if I missed this, and I think you discussed this as part of the last Q&A, but the 5% to 7% long-term EPS growth target, is that Is that still sort of where you are projecting long-term earnings growth?
spk11: Yeah, we establish that once a year. And we'll come back to you with a new five-year plan. I guess it's in February. But, yeah, that's us. Okay, got it.
spk08: Thanks. And then maybe just can you comment on there was some discussion off it, just bill increases. What should we expect here in the – in the near term, excuse me, given the fuel price increases, what are we looking at over the next few months in terms of customer bill increases and how could you potentially offset some of that?
spk11: Yeah, hey, Dhargish, we have a policy, you follow us for some time, of never front running a regulatory process. We're not going to start now. So that's going to be a question I let alone for now. When we see results, then we'll be able to speak to this specifically.
spk08: Understood. Thank you again.
spk11: You bet. Thank you.
spk06: We have a question from Angie Storzinski with Seaport Global. Please go ahead. Your line's open.
spk14: Angie, how are you? Great. Thank you. Thanks for taking my question. So just a couple of questions about the Volvo 4. So is there an agreement between the co-owners As to the in-service date and how the companies are showing it, I almost feel like I think I'm referring here to Oglethorpe. It seems like they're showing first quarter 24 as a COD for Vogel 4, and I'm just wondering if this is basically what the whisper date is, or is it that it's up to them to actually make a call on the start of commercial operations?
spk11: Angie, it's a wonderful question. Our performance to date indicates that we are within the reasonable expectation of achieving a year-end 23-in-service date. You'll have to ask Old Wheel Thorpe why they may depart from that.
spk14: Okay. And then secondly, just tracking the ITACs for that unit. And I remember that they were very lumpy with Unit 3. So it's Again, I mean, it seems like you need very many of them to start your load. So again, is there any pattern in those ITACs that we should be worried about? Or again, they're just as lumpy as they were with Unit 3?
spk12: Yeah, there's about 240 or a little above that remaining on Unit 4, Angie. And yeah, there's not a normal cadence, if you will. And there's also a lot of things that are tied to particular milestone tests, so hot functional testing as an example. There will be a lot that either come as a result of that or after that, and that's where we really started focusing on them for Unit 3 and kind of laying out the remaining schedule. But I would not expect any sort of linear progression there. It will be lumpy.
spk11: Well, in fact, Angie, your memory is absolutely spot on. It is lumpy, and the reason it's lumpy is When we finish systems, then we are able to submit the ITACs. And recall a problem we had, I guess it was earlier this year, right around the end of the year into January, finishing up all of the paper. We think we put in place controls, processes, which will speak to that. We should not repeat that problem. So as we finish system completions associated with the big milestones, right, so ultimately hot functional test, you'll see a big ramp-up, a lumpy-looking ramp-up of submittal of ITACs.
spk14: Great. And just one follow-up, and I appreciate that you have limited visibility as to the way the elections are going to be run for the commission. Now, when I think about the... the Putin's review and the elections that may happen in between now and then, how many of the commissioners will have been replaced? Again, I know that it depends when the elections actually happen, but just theoretically.
spk11: I couldn't even hazard a guess at that. It really depends on when the legislature comes up with this process. I I have no idea when that will be or what the outcome will be, and therefore it's hard to answer your question.
spk12: I'm sorry, but yeah, but based on the current terms Angie there, there were only two up from this year and there were none scheduled for next year. And so just again, if this gets resolved quickly, it will be the two. That would participate in a special election. There's another commissioner of reelection in 2024.
spk14: Very good. Okay, that's all I need. Thank you.
spk11: Election, yeah.
spk06: Our next question is from Paul Fremont with Mizuho. Please go ahead. The line's open.
spk04: Hello, Paul. Hey, how's it going? Congratulations on a good quarter.
spk11: Thank you. Appreciate it.
spk04: Can you update us on the construction work that's left on Unit 3? I think you had indicated that you were doing construction after you got the 103G letter up until fuel load. Is all of that construction completed, or how many hours of construction are remaining there?
spk11: a tiny amount, and I wouldn't almost refer to it as construction at this point. It's really finishing the finest tunings, as you can imagine, in order to go critical. For example, we've loaded the fuel. We have to put the top on the reactor vessel and ratchet down the enormous fuel bolts structures that will tighten that top down. We have to finish what they call coating. So this would be areas like walls that just need to be painted that weren't required on a safety related basis. It is finally so in the reactor vessel, in order for us to load fuel, it had to be pristine cleanliness and actually putting the top on the reactor vessel preserves that condition. We want to finish all of the minute cleaning procedures that will be necessary for us to run that plant. It's stuff like that.
spk04: And is this, I mean, is it days, weeks, months?
spk11: Well, what I would say, Paul, is the next milestone we're guiding you to is criticality and that's January.
spk04: So you would finish then the construction between now and then, or whatever additional work there is between now and January?
spk11: Yes, sir. I'm not sure I would call that construction, but yeah, that's right.
spk04: And then can you discuss the secondary steam systems in the plant? Do we need to wait until after criticality when you go through that testing phase to make sure that that system is working the way that you want it to work? Or can you address that earlier?
spk11: So here's the thing. There is a prescribed process. And it's a great graph, but nobody will let me put it out there. But it's a really interesting looking graph. that shows a prescribed process of taking the plant up in power and then taking it down. For example, within, I think, the first week or so, 10 days, we'll get to 25% power. Then they take it down. And then we'll go to 50 and take it down. Then we'll go to 75 and take it down. Then 90 and then 100. They do all sorts of trips and bells and whistles along the way. And what they're trying to do is what may be a condition that could exist once the plant goes in service to make sure that everything works as it is supposed to. If you want more details on that, we filed the VCM here recently, and there's a good bit of background in that VCM report that we filed that can give you more here if you want to see it.
spk04: Great. And then last question for me, I'll take a shot at what somebody asked as an earlier question, but would you expect to settle the general rate case, or do you think the parties are too far apart?
spk11: Oh, no, it's not. Whether we settle or not has no bearing on too far apart, or at least hasn't in the years past. You know, Paul... I mean, you've followed us forever, it seems like, and we have had this process in place since 95, and every three years we go through this. And typically we reach an agreement just before the holidays. I would expect that to occur again. There's a lot of value. It's almost therapeutic, if you will, to let everybody's views come out in the open and have a good, fair debate. We've been treated fairly every other time, my sense is. we'll be treated fairly again.
spk04: Great. That's it for me. Thanks.
spk11: Always appreciate you joining us.
spk06: And we have a question from Travis Miller with Morningstar. Please go ahead. Your line's open.
spk05: Hello. Thanks for taking my question. The customer growth, to the extent that that continues above the forecast, what does that mean for Mixed? of capex spending in terms of distribution versus potentially even transmission, but certainly distribution versus generation. Where does that stand?
spk11: You know, if I remember correctly, Dan, again, correct me if I'm wrong, in the old days, we spent about a billion a year on T&D kind of every year. I would argue that may be amped up a little in recent years because of what I would call hardening or resilience expenditures. You remember Hurricane Yuri, Hurricane, gee whiz, Winter Storm Yuri that went through Texas. One of the things we did in a proactive way was to look at our kind of planning margin system average temperature, and we reduced that temperature to give us more margin on extreme weather. Those are the kinds of things that we are spending more money on T&D for, I would argue. Bob White- As well, there is some T and D expenditures that will be intertwined with ultimately our generation location decisions. Bob White- And I think we've been over this a lot with you guys, but if you look at North Georgia what's the final disposition and when a plant Bowen. Bob White- Whether we locate more generation in the north or let more generation be located in the south and add the transmission. necessary to get that generation to the load center. Those are the kind of decisions that we'll cover in the next, I don't know, three to five years.
spk05: Okay. That's helpful. And then real quick, back on the capital allocation, I know you can't talk about what the board's going to do, but what are general thoughts on the dividend to the extent that you get to that post-Vogel 4 to 430? Obviously, that suggests a significant jump. What are your thoughts on that side?
spk12: Yeah, Travis. This is Dan. We've talked about this in an earlier call. If you look in our slide deck, slide 21 kind of represents the uplift from the completion of BOGO from a cash flow perspective. We're really thinking about that uplift supporting three things. One is an improvement in our overall financial profile, in particular our credit profile. Thing two is it continues to fund our growth. And then thing three is the dividend. We have increased the dividend every year for over two decades now, going back 75 years. We've never cut the dividend. It's an incredibly important part of our overall value proposition. As we get to 2024, given the improvement in our profile and given a durable growth rate, We think the board will certainly have the opportunity to reevaluate the pace of growth and perhaps better align the growth in the dividend with growth in earnings.
spk05: Okay. That's great. I understand. Thanks so much.
spk11: Thank you.
spk06: And that concludes today's question and answer session, sir. Are there any other closing remarks?
spk11: No, I'm just reminded. Maybe age is getting to me, but I can remember one time, oh, I don't know, five, six years ago, where somebody was pleading with me to have a boring earnings call. You know, the old mantra of regular, predictable, sustainable starts to reenter our dialogue now as we finish these major milestones on Vogel and we look towards the future. I wouldn't say this was a boring call at all, but it certainly has. less volatility in it, given the performance that this company has been able to achieve. Here's hoping for the future. We feel confident. We look forward to finishing the year strong and looking forward to a new year next year. Thank you all for joining us, and we appreciate it. See you soon.
spk06: Thank you, sir. Ladies and gentlemen, this concludes the Southern Company third quarter 2022 earnings call. You may now disconnect.
Disclaimer

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Q3SO 2022

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